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Compulsory licensing: Reverse engineering perpetuated - Views on News from Equitymaster
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  • Nov 4, 2000

    Compulsory licensing: Reverse engineering perpetuated

    With new drug discovery costs accelerating at a rapid pace and multinational drug companies consolidating operations via mergers and amalgamations, the advent of product patents post 2005 could lock the domestic pharmaceutical industry out of the upper end of the domestic market. This could hurt the domestic companies specially considering the fact that the market for mass market drugs such as penicillin based antibiotics and pain killers such as nimesulide is stagnating whereas products catering to life style diseases such as asthma, ulcer and cardiovascular are likely to lead profitability in the future.

    It is this scenario that is forcing the domestic pharmaceutical companies to hanker for compulsory licensing. Simply put, compulsory licensing allows companies to manufacture a patented drug by paying royalty on sales to the patent holder. (In the new scenario patent holders have an exclusive rights for twenty years up from the seven years.) The conditions under which compulsory licensing could come into play could either be monopolistic pricing by the innovating company or failure to manufacture the drug locally.

    With quite a few pharmaceutical multinational companies (MNCs) planning to follow the import–to–sell model, domestic pharma companies could well argue that compulsory licensing should be allowed in the country. Y. K. Hameid, Chairman and Managing Director, Cipla in his address at the company’s annual shareholders meeting said, “The present patent law has played a major role in ensuring that drug prices in India are among the lowest in the world and has facilitated the introduction of new drugs in the country. However, all this may change after 2005 when the patent law is likely to be drastically modified. Unless the government provides for compulsory licensing the new law would affect both the availability and the affordability of essential drugs.”

    This is not to say that Indian companies have been unable to compete. Infact, Dr. Reddy’s has been able to patent an insulin sensitiser and earn milestone payments. Ranbaxy developed a drug delivery system for ciprofloxacin and licensed it to Bayer. Cipla itself has consciously chosen a different route to R & D and that is to develop better processes for the manufacture of difficult to synthesise molecules. It is offering these intermediates and bulks to innovators and major generic companies. For this purpose it has filed 33 Drug Master Files in areas such as asthma, cardiology and oncology. So its not that Indian companies would not be able to survive in the new business environment but the fact remains that they are loathe to change their winning formula.

    Is this growth sustainable?
      FY98 FY99 FY00 CAGR
    Ranbaxy 13,821 11,296 16,670 9.8%
    Cipla 5,144 6,172 7,597 21.5%
    Dr. Reddys 3,316 4,259 4,930 21.9%
    Sun Pharma 2,676 3,558 4,765 33.4%

    The fact remains that drug prices in India are among the lowest in India and that is in no small measure due to the fact that process patents were allowed in India. These allowed reverse engineering of patented drugs and helped Indian companies to offer top of the line drugs in India at affordable prices. Infact, the wonder antibiotic ciprofloxacin, which was a patented drug (patented by Bayer) is produced by 50 Indian companies in India. Had ciprofloxacin not been produced in India, there was no way that Ranbaxy could have come up with a better drug delivery system for it!

    Similarly, Cipla was the first Indian company to manufacture and market an anti–AIDS pill, branded Nivimune. The total cost for the entire anti–AIDS therapy comes to around Rs 1,800 per day, which is unaffordable by large sections of the Indian populace. Multinationals such as Glaxo have been planning to introduce their patented anti–AIDS therapy at a discounted price of Rs 800 per day especially for the Indian market. But overall costs of Cipla’s anti–AIDS therapy would be relatively cheaper.

    If compulsory licensing does come about it would mean that good times for Indian pharmaceutical companies could continue even post 2005. This is because it would give a new lease of life to the business model that these companies have successfully followed so far.



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